Moody’s Investors Service downgraded the long-term and short-term ratings of American Express Company (“Amex”). The senior long-term debt rating was lowered to A3 from A2; and the short-term rating was lowered to Prime-2 from Prime-1. The outlook for the Amex long-term ratings is negative.
Moody’s also downgraded the long-term ratings of American Express Travel Related Services (“TRS”) and its rated operating subsidiaries, including American Express Credit Corp. The senior debt and deposit ratings of TRS and subsidiaries were downgraded to A2 from A1. The Bank Financial Strength Ratings of American Express Bank, FSB and American Express Centurion Bank were also lowered to C+ from B-. The Prime-1 short-term ratings for TRS and its rated operating subsidiaries were affirmed. The rating outlook for the TRS debt and deposit ratings is now stable. The outlook on the Banks’ Financial Strength Ratings (“BFSR”) is negative. These rating actions conclude the review initiated on February 25, 2009.
This rating actions reflect the erosion of Amex’s asset quality and weaker revenue trends stemming from the severe U.S. economic recession and the firm’s relatively high credit exposure in the states most heavily affected by home price declines, particularly California and Florida. Moody’s believes that these developments, in combination with structural and regulatory changes in the credit card and consumer lending industry, pose longer term challenges to the company’s franchise.
Given the pervasive weakness of the U.S. economy and the sharp rise in U.S. unemployment, Amex is likely to experience continued asset quality erosion in its managed lending portfolio, increasing the need for additional loss provisions throughout 2009 and quite possibly well into 2010. In addition, economic weakness in the U.S. and globally has resulted in declining trends in the firm’s billed business and revenues – a trend that will most likely persist into 2010, placing further pressure on earnings and capital adequacy measures. The firm is aggressively reducing costs in an effort to counter these trends. Its ability to execute these cost measures will be critical to its profit picture. Moody’s notes that the company successfully cut costs in past downturns.
Despite the negative rating actions, Moody’s notes that Amex maintains a number of key fundamental strengths. These include strong franchises in charge cards and credit cards, a high proportion of non-spread income, and the expected sustainability of its high-margin businesses (reflecting the strength of the American Express brand and the pricing premium the company commands in its global merchant network). The company has also developed a sound liquidity position and contingency funding plan despite the lack of core bank deposit funding. Finally, the company maintains solid capital metrics.
As noted, Moody’s assigned a negative outlook to Amex’s parent company ratings and the BFSR of the bank operating subsidiaries. The negative outlooks reflect the fact that the company remains exposed to a more stressed economic environment than is currently expected, and performance could be meaningfully affected by even higher credit costs. Moreover, Amex could be negatively affected by secular changes affecting the U.S. credit card industry, in particular regulatory and legislative initiatives. These initiatives could have both direct (Reg AA and potential credit card legislation restricting industry re-pricing flexibility) and indirect (potential mortgage cramdown legislation regarding Chapter 13 bankruptcy filers) effects on the credit card space. Any combination of these events could lead to lower returns and profitability than the company has historically reported.
Although Moody’s previously has not ascribed any level of systemic support to Amex and its rated operating subsidiaries in the event of financial distress, we now incorporate the view that the probability of systemic support for U.S. banks, like Amex, with more than $100 billion in assets, has increased. After taking into account a low probability of support, the outlook on the debt and deposit ratings of TRS and its rated operating subsidiaries is stable despite our negative outlook on the BFSR. This indicates that should Amex’s ratings or the banks’ BFSR be downgraded in the future, the effect on the debt and deposit ratings of TRS and its subsidiaries is expected to be more muted.
In order to return to a stable outlook for the parent company ratings and BFSR, Amex would need to demonstrate a stabilization of asset quality (as evidenced by improvement in delinquency and net charge-off metrics) and sustained improvement in core profitability. Factors that could lead to a negative rating action include an elevation in credit costs that is not effectively mitigated by offsetting cost reductions or revenue gains — thus leading to capital reductions; erosion in core consumer charge/lending profitability; a material shift down the credit curve and away from the traditional high-end Amex customer base; or significant erosion in the firm’s contingent liquidity position.
The last rating action on American Express Company was on February 25, 2009, when Moody’s placed placed Amex’s ratings, and the long-term ratings of its subsidiaries, on review for possible downgrade.
D.C.